“Necessity [is] sometimes the mother of invention,” telecoms tycoon Charlie Ergen told Wall Street analysts late last year, when they asked just how his distressed satellite TV group Dish Network would tackle looming maturities on its $26bn debt pile.
But the complex debt restructuring proposal served up by Ergen last month has proved too creative for most Dish creditors.
The mercurial billionaire Ergen — a former professional poker player, now in his 70s — has sparked furore among creditors of EchoStar, Dish’s parent company, with a highly choreographed series of manoeuvres designed to reduce their anticipated payouts and shore up the company’s balance sheet.
EchoStar has now had to scrap two attempts to convince lenders to exchange their debt and lock in losses — the latest on Monday, when it terminated plans to restructure $4.9bn of bonds.
“Certainly, Charlie has broken a lot of trust and credibility that he had in the market,” said one EchoStar bondholder, speaking before the latest cancellation. “I don’t think we’ve seen something that’s banded the market together like what Charlie put on the table.”
Ergen, Dish and EchoStar did not respond to requests for comment.
The restructuring Ergen proposed was the latest in a string of so-called “distressed exchanges” across corporate America: a type of deal that typically strips debt holders of claims to a company’s underlying assets.
Distressed exchanges have soared in popularity as a way for shareholders to preserve their equity and forestall bankruptcy. At the height of the global financial crisis in 2009, distressed exchanges made up just over two-fifths of all US corporate defaults. Last year, they accounted for two-thirds, according to a Moody’s analysis.
Ergen’s distressed exchange, launched early this year, started with the movement of Dish collateral out from under the company’s existing bondholders. Shorn of these valuable assets, he then sought to persuade investors to swap their old bonds for new, collateralised ones — at a discount of as much as 40 per cent to their par value.
A secured EchoStar bond due in December 2028 is trading just below 70 cents on the dollar — a threshold widely perceived to be a marker of distress. Even after a recent uptick, an unsecured bond maturing in July of that year is trading far lower, at less than 50 cents.
Ergen is just one of a number of telecom titans who binged on cheap debt during the era of ultra-low interest rates and now face the one-two punch of higher borrowing costs and technological obsolescence.
For years Ergen had been buying up spectrum with the hopes of assembling a mobile phone operator that could challenge the likes of behemoths Verizon and AT&T. But empire-building at Dish had proved slow-going — and in the meantime, its cash cow of pay-TV has eroded to the point of imperilling Ergen’s broader empire.
Others in the sector to have struggled include Lumen, a legacy wireline telephone network operator that has seen its market capitalisation tumble from $15bn to $1bn in the past five years; it has $20bn in debt accumulated, in part, to build a fibre offering. Altice USA, a roll-up of regional cable television providers, has seen its own equity value shrivel to just $1bn set against $25bn of debt.
Defaults in the wider technology, media and telecoms sector have started to creep higher, and market participants are predicting that distress among TV and communications groups will deepen this year. Moody’s said last month that it expected telecoms to be one of the industries with the highest default rate in 2024.
Technology, media and telecoms are “the soft spot right now” among sectors, said the EchoStar bond investor. While broadcast TV and radio are under pressure from shifting advertising trends, cable — “which looked really defensive for many, many years” — is now facing competition from fixed wireless technology.
Weak growth and dated technology have collided head-on with over-levered and poorly financed capital structures, said Craig Moffett, a veteran telecoms analyst.
The Big 3 mobile operators in the US — AT&T, T-Mobile and Verizon — had invested hundreds of billions of dollars in their networks in the last decade, he added, leaving Ergen well behind in the arms race. “This is the hangover after a decade-long party.”
Ergen’s ability to announce the transference of billions of dollars of spectrum and 3mn pay-TV subscribers outside of the reach of existing creditors also highlights the scant protections bond documents offered investors in the post-financial-crisis era.
“The key to all of this is the lack of covenants that have been foregone for 10-plus years,” said one portfolio manager, who avoided investing in Dish’s debt. “When the music stops . . . there’s going to be a lot of manoeuvring.”
But the debt restructuring pitch is nevertheless seen as particularly audacious.
Dish bondholders had anticipated that something was coming, according to one person involved in talks between creditors. But when Ergen shifted the collateral at the start of this year, they expected he would seek to raise cash by selling new secured debt against the shifted assets.
Instead, in the following days, Dish-EchoStar launched the distressed exchange offers.
“The exchange is pretty aggressive,” the portfolio manager said in the weeks leading up to the recent terminations of Echostar’s debt restructurings. “I think there’s going to be a lot of soul searching . . . Dish has a very large capital stack; if you don’t own hundreds of millions of bonds, you’re going to be left outside the big boy table in terms of negotiations.”
Any further restructuring is expected to be a highly contentious, lengthy process that is likely to descend into litigation, according to creditors.
“No one trusts Charlie and everyone is on edge,” said one person close to a group of the creditors, a majority of whom have joined forces to hold their ground against Dish.
Ergen and his team “obviously tried to come up with a transaction that was creative, and the market just said ‘no’,” according to another debt market participant.
But despite creditors’ rejection of Ergen’s initial proposals, the person added that they still “have other options at their disposal”.
“We’ll see what the next version of that looks like.”
